Towards construction of an investor sentiment index in the Arab stock markets

Abstract

The investor sentiment index (ISI) is one of the main issues in behavioral finance on the global stock exchanges in general and the Arab stock markets in specially. This research paper proposes a model for measuring the ISI in the Arab stock markets on the one hand, and on the other, tests the relationship between proposed ISI and the volatility of returns. We used the principal component analysis for the ISI proposal and the DCC-GARCH for testing the relationship between the ISI and the volatility. This study includes three Arab stock markets: Saudi Stock Exchange, Abu Dhabi Securities Market and Qatar Stock Exchange. We use the monthly data for six variables as sentiment proxies and three macroeconomic variables during the period from 01-01-2007 to 31-12-2017. We concluded that investors' sentiment has a role in determining the returns and volatility of stocks. The study recommends the need to understand and know the most influential behavioral factors on the Arab stock markets, which enhances the level of efficiency and hence, positively affects the economy.